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Aave Cryptocurrency & Its Benefits In The Financial World
The world of cryptocurrencies is undoubtedly innovative. That is why it is the evolution of the world financial system. Of course, this is just to mention a small part that can encompass this new world that has been developing in different areas. The development of blockchain technology has captured the attention of different experts from various fields. This was because of the potential that this innovation demonstrates, coming to be compared to the first appearance of the internet. That consists of a decentralized database model, thus proposing that there is no central certifier. Nevertheless, the bases and conditions can be agreed by the participants, publicly and available to all. Today, we are going to talk about Aave and other topics subject to the world of cryptocurrencies.
Economic & Social Impact of Cryptocurrencies
That is why the world of cryptocurrencies «threatens» to change (for the better) economic and social areas to which we are accustomed day by day. Firstly, in the financial field, we have DeFi or Decentralized Finance. It consist in making loans in cryptocurrencies in a decentralized, secure and transparent way. We will delve further into all the advantages and innovations that this new system brings.
As for the social field, the advancement of the development of blockchain technology has borne fruit in the form of a new concept. (NFTs, acronym for Non-Fungible Tokens, or cryptoactives). To understand this concept, the concepts of fungible goods will be briefly explained. However, it must be clarified that the impact of these digital goods goes far beyond the social.
Fungible & non-fungible assets
A fungible asset is any asset that can be replaced by another without losing any value, since it varies depending on a number. (Its weight or measure). In addition, this asset would be consumed as quickly according to use given to it. Therefore, the more it is used, the faster it will wear out and come to an end. A clear example of this is clothing, which is a good that wears out over time until it deteriorates and is later destroyed. However, we can buy more clothing, that is, it is replaceable.
On the other hand, a non-expendable asset is that asset that is unique and irreplaceable that cannot be consumed when used. A clear example of this could be an artistic sculpture. This, being in the living room of a house, is not consumed and if it were to be destroyed. It cannot be replaced by another. This since one artistic sculpture is not equivalent to another and therefore cannot be replaced as in the case of clothing.
So… What is an NFT?
As its own description indicates, an NFT is a non-fungible token. A token is a currency or unit of value that is assigned to a project or business model. Previously, it was mentioned that the impact of NFTs goes far beyond the social. This is because NFTs are closely linked to cryptocurrencies, at least in a technological sense. This since, if we remember the concepts previously given, while cryptocurrencies are a fungible good, NFTs are not.
Considering this and in short, an NFT would be a unique asset, unalterable and irreplaceable by another that has the same value. Because, going back to the example of the sculptures, there are no NFTs that are the same. Just as there are no two artistic sculptures that are. In addition to its concept, it is important to know how NFTs work. This since this will be useful when wanting to carry out an economic action with them. This alongside its importance, given that we will understand why people spend money on them.
How do NFTs work?
They work through the blockchain, the decentralized database on which the entire world of cryptocurrencies is based. The NFTs receive a digital certificate of authenticity that cannot be modified and is registered in this database. With this information, its authenticity is guaranteed and the starting value of the asset and all the transactions carried out with it are listed. And it is thanks to this that people seek to trade these assets. This since they are being listed as something authentic and unique. Of course, in addition to also being the product of new technologies, its buyers speculate that its value will increase in the coming years.
It is important to know all these concepts. This because they are essential to know the operation of these new technologies that are contributing positively to the financial world for various reason. We have already seen some of them, such as tokens and NFT. However, there is a relatively young one that has achieved every revolution in the financial world: DeFi.
What Is DeFi?
The term DeFi comes from Decentralized Finance. It focuses on executing the financial projects that we have always known, but with the advantages that blockchain technology provides.
Let us remember you some of them: transparency and decentralization. The DeFi seek to create a system that seeks to provide multiple solutions for finances. And with it, make the current financial institutions go into the background. Or even better: disappear, since they are centralized and provide bureaucracy, added costs and unnecessary waste of time.
How Does DeFi Achieve This?
DeFi proposes to convert today’s centralized finances into decentralized systems, without third parties that add unnecessary costs to operations. This through the use and application of Smart Contracts that capture each movement, each operation in a blockchain transparently and unalterably.
Smart Contracts, The Evolution of Transparency
Contracts are currently known as high-value written documents or papers, tied to laws and jurisdictions. This in addition to the fact that, in the worst case, they will require the presence of a notary. This turns itself into more expenses and also means that they are inaccessible to some people. And as if that were not enough, these documents are subject to interpretation.
Conversely, a smart contract is a contract capable of executing and fend for itself. (In a decentralized and automatic manner, without the need for the presence of third parties). It is NOT subject to interpretations because it is not written in the language we are talking about. Instead of that, it is based on different scripts written in programming language. Besides, it is able to assert itself without depending on the authorities. Nevertheless, perhaps one of the most important characteristics it has is that it is a public code written on the blockchain. Consequently, it cannot be changed in any way.
This represents an incredible advance in the world of finance. This since, by not requiring the authorization of third parties for its validity, it allows a wide range of people to acquire said services. (Which were previously impossible to obtain). Additionally, they also support benefits for those who constantly use these tools. This since time is optimized by not having to be reviewed and approved by third parties.
Aave, The Project with the Longest Journey in DeFi
So, we have different DeFi projects in the crypto market, among which we have Aave. It stands out for its extensive experience in this sector, being the evolution of one of the pioneering and oldest projects focused on DeFi: ETHLend. Said project, originated in 2017, was developed by Stani Kulechov, who raised 17 million dollars through a successful ICO (Initial Coin Offering). In this way, at the end of 2017, the LEND token was launched, the main of the platform. Kulechov had the idea of creating a safe, decentralized and transparent lending market through the Ethereum network and its smart contracts. In that way, it would allow people to earn money by making loans in cryptocurrencies by making them act as lenders.
The Borrowers, who were mostly traders, welcomed working in this way, since they could pawn their crypto assets to get a loan. Besides, they could also use it as a means of leveraging their positions in order to generate a greater amount of profits. After this, they could pay the credit obtained little by little and recover their pawned crypto assets. This platform even had the advantage that if their pawned assets were revalued, the payment of the credit could be closed quickly. All this is thanks to the smart contracts.
A year later, in 2018, ETHLend was in trouble when it presented logistics problems to get lenders. In addition to this, the world of cryptocurrencies was renewing itself more and more. It saw the need to renew and offer new and better services to its consumers. So, they decided to renew the platform and in this way, Aave was born.
How did Aave Evolve & How Does it Achieve its Goal?
Therefore, Aave went from making loans in cryptocurrencies to one based on liquidity markets. There, the availability of assets in the market will determine its prices by creating the first platform for massive use of liquidity pools. This was in order to obtain enough liquidity to be able to carry out a wide range of operations. Then, in 2020, they launched their own Mainnet: the AAVE V1. It is a mechanism which would allow them to carry out the project, leaving ETHLend obsolete and abandoned. After this, the launch of the Aave token was arranged and at the end of the same year. (AAVE V2, the current protocol of the project, was launched.)
How Does Aave Work?
It consists of having a market of different liquidity pools of various cryptocurrencies in which any investor can inject liquidity. This to obtain commissions for an operation carried out in that pool. These commissions increase or decrease according to the demand that said pool has at that time. Such demand is calculated algorithmically in the same way that different exchange platforms do it, such as Uniswap. This is where the powerful smart contracts act, which make sure to execute the payment orders and calculate the commissions accordingly.
To secure these loans, a collateral of up to 30% is also required over the value requested on loan made up of tokens supported by the platform. This percentage, although it is very high, it also prevents users from falling into default, as well as losses due to depreciation of cryptocurrencies. However, Aave offers truly differentiating products, which, in the right hands, can generate huge profits with clever strategies, all within the reach of a click.
Flash Loans: Immediate Results
This particular option allows the development of a smart contract. There, different operations will be carried out on various DeFi platforms through the Ethereum blockchain. However, despite being several operations on the network, they will all count as a single transaction as they are within a single transaction.
Anyway, the loan executed by Aave must be returned together with its interest in the last operation of the contract. Therefore, once it is executed:
- The loan is sent
- The different scheduled trades are carried out
- Finally, the money return to the platform.
But, what benefits could such an operation bring? Simply. Various trades can be carried out between different tokens in a beneficial way, generating a profit/loss assumed by the user. Said user, by programming all these transactions in their own smart contract, minimizes friction with the Ethereum blockchain. In turn, it saves expenses in taxes for use of the network and optimize time when performing the operation
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